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Rival Palestinian factions Fatah and Hamas on Wednesday proclaimed a landmark reconciliation pact aimed at ending their bitter four-year rift that has left them with competing governments in the territories envisioned for a future Palestinian state, but Israel's leader denounced it as a "mortal blow to peace."

International mediator Tony Blair insisted their new government must recognize Israel, a step Hamas has always rejected.

Palestinian President Mahmoud Abbas brushed off the criticism and instead used the occasion to deliver a scathing attack on Israel, saying "we reject blackmail and it is no longer possible for us to accept the [Israeli] occupation of Palestinian land."

The Palestinians have been torn between rival governments since a previous unity arrangement collapsed into civil war in June 2007. In five days of fighting, Hamas overran the Gaza Strip, leaving Abbas' Palestinian Authority in charge of the West Bank.

Wednesday's pact provides for the creation of a joint caretaker government ahead of national elections next year. But it leaves key issues unresolved, such as who will lead the government or control the competing Palestinian security forces.

It also makes no mention of relations with Israel — the issue that led to the collapse of the previous unity government. Abbas favours a negotiated peace with Israel, while Hamas refuses to accept Israel's existence.

In his speech, Abbas rejected Israel's opposition to the pact, saying the reconciliation was an internal Palestinian affair.

"They are our brothers and family. We may differ, and we often do, but we still arrive at a minimum level of understanding," Abbas said.

Later in the day, Abbas travelled to Germany, where he is to meet Thursday with Chancellor Angela Merkel.

Germany's foreign minister, Guido Westerwelle, sounded skeptical about the unity pact, saying of Hamas, "Anyone who questions violently Israel's right to exist is not a partner from our point of view."

Blair said the world would demand the new government renounce violence and recognize Israel's right to exist — something that Hamas has always refused to do.

Despite an informal cease-fire that ended Israel's punishing invasion two years ago, hundreds of rockets have been fired at Israel from Hamas-ruled Gaza.

"If the principles are not upheld, it puts us in a very difficult position," he told The Associated Press. "I think the central question people ask is, 'Does this mean a change of heart on behalf of Hamas or not?' ... We want them in this process. Otherwise there will be no peace."

Israel denounced the pact because of Hamas' long history of suicide attacks and rocket fire against Israeli targets. Israel, the U.S. and the European Union all consider Hamas a terrorist group.

"What happened today in Cairo is a mortal blow to peace and a big prize for terrorism," Prime Minister Benjamin Netanyahu said during a trip to London. "Israel continues to want peace and seek peace but we can only achieve that with our neighbours that want peace. Those of our neighbours that seek the destruction of Israel and use terrorism are not partners to peace."

British officials said they were waiting for more details, but expressed hope the agreement would boost the peace process.

Hamas leader Khaled Mashaal told the ceremony in Cairo that his group was prepared to do anything to "translate the text of the pact to facts on the ground. Our battle is with the Israeli enemy and not with Palestinian factions."

Hamas and other Palestinian militant factions in Gaza have agreed to abide by an unofficial truce with Israel, largely in place since Israel's January 2009 war in the territory. But it is unclear how long that truce will last, and Hamas has often looked the other way while smaller militant groups fired rockets into Israel.

Fatah and Hamas officials will meet soon to work out the details of their agreement, said the head of the Fatah delegation in Cairo, Azzam al-Ahmed.

He told the AP that all issues would be tacked simultaneously, including formation of a new government, release of prisoners and "ending campaigns of one side against the other."